Appeal of Shared National Credit (SNC)-(Fourth Quarter 2016)

Background

A participant bank appealed the substandard rating assigned to a revolving credit facility during the August 2016 SNC examination.

Discussion

The appeal asserted that the credit should be rated pass. The appeal argued that the substandard rating was based on the company’s deteriorating financial position and high leverage. However, the appeal asserted, with the recent asset sale, debt reductions, and improved operational performance, leverage has dropped and is reasonable.

Conclusion

An interagency appeals panel of three senior credit examiners concurred with the SNC examination team’s originally assigned risk rating of substandard.

The appeals panel concluded that the substandard rating is warranted due to well-defined weaknesses, including insufficient cash flow to repay debt in a reasonable time frame, declining utilization rates, and negative revenue trends. Revenues declined significantly in the first half of 2016, and revenue volatility is projected to continue. Annualized free cash flow as of second quarter 2016 reflected a protracted 19-year debt repayment period. The appeals panel concluded that, based on inadequately monitored collateral to support its useful life and unsupported maintenance capital expenditure requirements for the collateral, cash flow is insufficient to retire debt in a reasonable time frame.

The appeals panel agreed that the recent asset sale and pay down on the revolver improved the company’s leverage and liquidity, but noted that well-defined weaknesses remain, as reflected by the company’s declining financial performance and projected inadequate repayment ability over a reasonable time frame.